The Economist has a cheery new nickname for the US: "the Unsteady States of America." In an editorial that accompanies a cover story on Detroit's bankruptcy, the editors argue that other cities and states will make a huge mistake if they dismiss this warning. Yes, Detroit is unique in some ways—its long reliance on the auto industry is one example—but not in one very important way: "Many other state and city governments across America have made impossible-to-keep promises to do with pensions and health care," the editors write. "Detroit shows what can happen when leaders put off reforming the public sector for too long."
Consider that when realistic rates are applied, state pension funds are only 48% funded, a "terrifying" statistic. Something has to give, and the whole mess is sure to wind up in the Supreme Court. Among the long-range fixes: Public employees will have to work longer, and "states should accelerate the shift to defined-contribution pension schemes, where what you get out depends on what you put in." It won't be pretty, and the federal government will likely have to help public sector retirees in the interim. "Taxpayers should not bail out feckless local governments or investors who should have known the risks," say the editors. "But they should help pensioners left stranded through no fault of their own." Click for the full editorial. (Read more Detroit stories.)